Basket of Seven - Current yields and discounts

[Luniversal]

Merchants' record of 36 years of rising income...well, if they have been overpaying, they're managing to keep all the balls in the air for a long time.

https://www.sharesmagazine.co.uk/news/s ... -milestone

Current yield of 5.6%

In 2000-17, Merchants grew dividends per share at 2.5% pa; it ranked 20th of 24 in my 'Universe of 24' UK income-oriented trusts which have lasted the past two decades. The only lower-ranked members were Shires, Troy, Secs Trust of Scotland and Aberdeen Diversified (formerly British Assets), which all had to rebase payouts because they had overdone them.

Merchants's dps has reduced in real terms (deflated by RPI) in 13 of its last 20 financial years, including the past nine. It uses the money illusion of small but subinflationary rises to preserve an unwarranted 'dividend hero' status.

Funding structural debt may relieve the income account, but the commitment to a juicy headline yield- the highest in the Basket of Eight- constrains it. As a component of the B8, intended for shorter-term holders who want an immediate bang for their buck, Merchants serves its purpose. But not for those contemplating a lengthy retiral-- for them my apothegms of 'Don't chase the yield' and 'Good Enough is better than Even Better' apply.

Lowland, cited above, has been a trust for the long haul. It is in the Basket of Seven. In 2000-17 it ranked sixth in the Universe of 24, growing dividends at 7.8% pa. Hare and tortoise.

[Lootman]

the commitment to a juicy headline yield- the highest in the Basket of Eight- constrains it. As a component of the B8, intended for shorter-term holders who want an immediate bang for their buck, Merchants serves its purpose. But not for those contemplating a lengthy retiral-- for them my apothegms of 'Don't chase the yield' and 'Good Enough is better than Even Better' apply.

From the performance numbers cited earlier, the only one of the seven with an acceptable capital performance was Bankers, which not coincidentally had a significantly lower running yield than the other six. The conclusion seems obvious - chasing headline yield is a false economy.

[Avantegarde]

Merchants has been an utter dog for the past five years. Total return over the past five years has been 18% (yes, you read that right: 18%) while a FTSE All-Share tracker would have given you a 29% return. A FTSE100 index tracker would have given you a 27% return. Meanwhile Merchants' average annual dividend growth rate for the past five years has been a measly 1.5%.

[77ss]

Merchants' record of 36 years of rising income...well, if they have been overpaying, they're managing to keep all the balls in the air for a long time.

https://www.sharesmagazine.co.uk/news/s ... -milestone

Current yield of 5.6%

There are plenty of ITs with long records of dividend increases. Nothing special about that. One has to wonder who actually wrote the singularly uncritical piece you quote. A journalist or Merchants? A bit of data from Saturday's Times (unchecked):

CTY (52 yrs), Bankers, Alliance, & Caledonian (51 yrs), BMO Global Smaller (48 yrs), F&C (47 yrs), Brunner (46 yrs), JPM Claverhouse & Murray Income (45 yrs) and Witan (43 yrs) are said to be the top ten for longevity of dividend increases.

If you need the immediate income (or are seeking a temporary home for your cash in today's turbulent times), then Merchants may be for you.

If you don't need the immediate income, then I see it as a dog - looking at total return. 18% over 5 years.

I am gradually moving from individual shares to Investment Trusts, so it was interesting to revisit Luni's Basket of 7. I shall not be buying any of them - although I may keep an eye on Bankers and Mercantile.

Using HL's charting facility, the modest yielding Bankers is the best of a poor lot (60% TR over 5 years). In for the long haul? Look elsewhere. The low yielding FCIT (the new EPIC for FRCL) has given 100% TR over 5 years, Alliance about 85%, Caledonian about 180% (hmm - perhaps I should look into this one) and Witan about 75%.

[monabri]

But how much has a bull market played in those returns and if we are entering a period of increasing interest rates and global slowdown will those returns be maintained?

[77ss]

But how much has a bull market played in those returns and if we are entering a period of increasing interest rates and global slowdown will those returns be maintained?

Quite right monabri - only time will tell.

As ever, the past is no guarantee of the future. Bull market, shifting investment strategies, the IT sector.....

[Arborbridge]

Let's not get confused here. Luni is right in proposing various shades of income IT for those in retirement, so it's horses for courses. High yield and lower growth has its place where - as he said - for those with immediate need of income. Or a lower retirement pot.

Some of the others may be excellent providers of TR (though I bet you we can all find some with even better go faster stripes) but with Witan yielding 2.3%, FCIT 1.6% and FGT 2.0% you would need to double or treble the pension pot - or starve while congratulating oneself on picking a good long term winner. Not much use when your body frozen from starvation is discovered after years of deprivation.

So, there's no point comparing apples with pears and trying to score points against one or the other. One simply has to go for which ITs you feel will do the job for your particular circumstances.

Arb.

[Quint]

Let's not get confused here. Luni is right in proposing various shades of income IT for those in retirement, so it's horses for courses. High yield and lower growth has its place where - as he said - for those with immediate need of income. Or a lower retirement pot.

Some of the others may be excellent providers of TR (though I bet you we can all find some with even better go faster stripes) but with Witan yielding 2.3%, FCIT 1.6% and FGT 2.0% you would need to double or treble the pension pot - or starve while congratulating oneself on picking a good long term winner. Not much use when your body frozen from starvation is discovered after years of deprivation.

So, there's no point comparing apples with pears and trying to score points against one or the other. One simply has to go for which ITs you feel will do the job for your particular circumstances.

Arb.

A good point and very well made. Nothing wrong however with splitting the portfolio to income and growth if your capital is somewhere in between. No need to tie yourself in to one strategy.

[OhNoNotimAgain]

But how much has a bull market played in those returns and if we are entering a period of increasing interest rates and global slowdown will those returns be maintained?

Why would interest rates go up if the economy is slowing?

The bull market was driven by QE from 2009 to 2015. It is a different world now.

[Lootman]

Let's not get confused here. Luni is right in proposing various shades of income IT for those in retirement, so it's horses for courses. High yield and lower growth has its place where - as he said - for those with immediate need of income. Or a lower retirement pot.

Some of the others may be excellent providers of TR (though I bet you we can all find some with even better go faster stripes) but with Witan yielding 2.3%, FCIT 1.6% and FGT 2.0% you would need to double or treble the pension pot - or starve while congratulating oneself on picking a good long term winner. Not much use when your body frozen from starvation is discovered after years of deprivation.

So, there's no point comparing apples with pears and trying to score points against one or the other. One simply has to go for which ITs you feel will do the job for your particular circumstances.

A good point and very well made. Nothing wrong however with splitting the portfolio to income and growth if your capital is somewhere in between. No need to tie yourself in to one strategy.

Yes, I think a strategy that eschews growth prospects and just bets on a high running yield could come a cropper if you end up living a lot longer than you had planned. Whilst if you are told you only have, say, five years to live then you might instead use bonds or an annuity.

What you really need in retirement is not "income" but rather "cashflows", and they can be sourced in a number of ways, including the judicious use of capital gains. I am in my mid-sixties and I cannot yet envisage a time when I will sacrifice growth just for a headline yield. So I subscribe to the view that it is total return that matters, not reaching for a high yield.

That said I think a lot more about investing in a share or fund that has a zero yield. But I have a few where I see 20% annual growth rates e.g. Amazon, Google and a couple of biotech ITs. And Berkshire Hathaway, of course. I don't have a lot of use for Luni's baskets as I find them to be too "samey" and UK-centric.

[GoSeigen]

Why would interest rates go up if the economy is slowing?

Why would the economy not slow if interest rates were going up? Happened in Turkey: rates up to 25%, economy goes into recession.

GS

[BrummieDave]

That said I think a lot more about investing in a share or fund that has a zero yield. But I have a few where I see 20% annual growth rates e.g. Amazon, Google and a couple of biotech ITs. And Berkshire Hathaway, of course. I don't have a lot of use for Luni's baskets as I find them to be too "samey" and UK-centric.

The UK centric aspect has been commented on previously, and also acknowledged by Luni since the baskets first appeared. I think I remember Luni saying more recently that a greater global reach would be built into the baskets now but we've never seen what the baskets, if created today with the same objectives (for B7 and B8), would comprise.

[Arborbridge]

That said I think a lot more about investing in a share or fund that has a zero yield. But I have a few where I see 20% annual growth rates e.g. Amazon, Google and a couple of biotech ITs. And Berkshire Hathaway, of course. I don't have a lot of use for Luni's baskets as I find them to be too "samey" and UK-centric.

The UK centric aspect has been commented on previously, and also acknowledged by Luni since the baskets first appeared. I think I remember Luni saying more recently that a greater global reach would be built into the baskets now but we've never seen what the baskets, if created today with the same objectives (for B7 and B8), would comprise.

Luni felt on more secure ground alking about UK ITs and eschewed wht he would call "furriners". Maybe he just understood them better. However, many of us that were interested in income would also have invested in a few overseas ITs to balance things a little - but don't forget that many of them at that time would not have provided the yield which was required by a retiree - except a few like HFEL which some might regard as a bit doggish anyway.

Arb.

[BrummieDave]

And let's not forget that 2 of the 7 ITs in B7a are Global, Murray International (around 90% international) and Bankers (around 75% international).

[Lootman]

And let's not forget that 2 of the 7 ITs in B7a are Global, Murray International (around 90% international) and Bankers (around 75% international).

Assuming that the other 5 ITs are 100% invested in the UK, that breaks down to an allocation of 77% to the UK and 23% to overseas.

In terms of global market cap, overseas is over 90%. So his portfolio is massively over-weight in the UK. Now that may be explained by the fact that the UK market is the only one Luni understands, as Arb suggested. (And I have long thought the same thing about Bland). But even so, it doesn't take much knowledge of foreign markets to know that you should have meaningful exposure there, especially as many countries have higher growth rates than the UK and/or have representation in sectors that are dead or dying in the UK.

I am probably about 75% invested overseas, and even that represents a significant over-weighting of the UK.

[BrummieDave]

Yes I'm with you, and wasn't suggesting that B7a was ideal in its global weightings, just reminding people that it isn't 100% UK.